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AMEND SECTION 14(b) OF THE
FEDERAL RESERVE ACT

HEARING
BEFORE T H E

COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
E I G H T Y - E I G H T H

CONGRESS

SECOND SESSION
ON

H.R. 11499
A B I L L T O A M E N D S E C T I O N 14(b) O F T H E F E D E R A L R E S E R V E
ACT, AS A M E N D E D , T O E X T E N D F O R 2 T E A R S T H E A U T H O R I T Y
OF F E D E R A L RESERVE BANKS TO PURCHASE UNITED STATES
OBLIGATIONS D I R E C T L Y F R O M T H E T R E A S U R Y

J U N E 11, 1964

Printed for the use of the
Committee on Banking and Currency

U.S. GOVERNMENT PRINTING OFFICE
34*165




WASHINGTON : 1964

C O M M I T T E E ON B A N K I N G A N D C U R R E N C Y
W R I G H T P A T M A N , Texas, Chairman
A L B E R T R A I N S , Alabama
A B R A H A M J. M U L T E R , New York
W I L L I A M A . B A R R E T T , Pennsylvania
L E O N O R K . S U L L I V A N , Missouri
H E N R Y S. R E U S S , Wisconsin
T H O M A S L . A S H L E Y , Ohio
C H A R L E S A . V A N I K , Ohio
W I L L I A M S. M O O R H E A D , Pennsylvania
R O B E R T G. S T E P H E N S , JR., Georgia
F E R N A N D J. ST G E R M A I N , Rhode Island
H E N R Y B . G O N Z A L E Z , Texas
C L A U D E P E P P E R , Florida
J O S E P H G. M I N I S H , New Jersey
C H A R L E S L . W E L T N E R , Georgia
R I C H A R D T . H A N N A , California
B E R N A R D F . G R A B O W S K I , Connecticut
C H A R L E S H . W I L S O N , California
C O M P T O N I. W H I T E , JB., Idaho




C L A R E N C E E . K l L B U R N , New York
W I L L I A M B . W I D N A L L , New Jersey
E U G E N E S I L E R , Kentucky
P A U L A. F I N O , New York
F L O R E N C E P . D W Y E R , New Jersey
S E Y M O U R H A L P E R N , New York
J A M E S H A R V E Y , Michigan
O L I V E R P . B O L T O N , Ohio
W . E . ( B I L L ) B R O C K , Tennessee
R O B E R T T A F T , JR., Ohio
J O S E P H M . M c D A D E , Pennyslvania
S H E R M A N P . L L O Y D , Utah
B U R T L . T A L C O T T , California
D E L C L A W S O N , California

JOHN R* STARK, Clerk and Staff Director
JOHN E . BARRIERS, Professional Staff Member
ALVIN L E E MORSE, Counsel
ORMAN S. FINK, Minority Staff Member

CONTENTS
H . R . 11499, a bill to amend section 14(b) of the Federal Reserve Act, as
amended, to extend for 2 years the authority of Federal Reserve banks
to purchase U.S. obligations directly from the Treasury
Statement o f —
Dillon, Hon. Douglas, Secretary of the Treasury
Martin, Hon. William McC., Jr., Chairman of the Federal Reserve
Board
_
Additional information submitted to the committee b y —
Dillon, Hon. Douglas, Secretary of the Treasury:
Direct borrowing from Federal Reserve banks, 1942 to date
(table)
-




m

1
2
2

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AMEND SECTION 14(b) OF THE FEDERAL RESERVE ACT
THURSDAY, JUNE

11, 1964

H O U S E OP R E P R E S E N T A T I V E S ,
C O M M I T T E E ON B A N K I N G AND C U R R E N C Y ,
Washington,
D.C.

The committee met, pursuant to notice, at 10 a.m., in room 1301,
Longworth House Office Building, Hon. Wright Patman (chairman)
presiding.
Present: Representatives Patman, Barrett, Reuss, Vanik, Moorhead, Stephens, Gonzalez, Minish, Hanna, Grabowski, White, K i l burn, Wianall, Fino, Mrs. Dwyer, Harvey, Brock, Taft, Talcott, and
Clawson.
The CHAIRMAN. The committee will please come to order.
We will first take up H . R . 11499, to extend the authority of the
Federal Reserve banks to purchase directly obligations of the U.S.
Government, and then we will take up in executive session, if it is all
right with the committee, House Joint Resolution 1041, introduced
by M r . Rains, to extend certain provisions of the Housing Act for
90 days.
(H.R. 11499 referred to follows:)
[II.R. 11499,88th Cong., 2d sess.]
A BILL To amend section 14(b) of the Federal Reserve Act, as amended, to extend for two years the
authority of Federal Reserve banks to purchase United States obligations directly from the Treasury
Be it enacted by the Senate and House of Representatives of the United States of
America in Congress assembled, T h a t section 14(b) of the Federal Reserve Act, as
amended (12 U.S.C. 355), is amended by striking out " J u l y 1, 1964" and inserting
i n lieu thereof " J u l y 1, 1966" and by striking out " J u n e 30, 1964" and inserting
i n lieu thereof "June 30, 1966".

The CHAIRMAN. Before we go into this Federal Reserve legislation, I would like to make a statement about the Defense Production
Act amendments, and specifically the amendment that drew the
opposition of so many members of the committee, concerning the
payment of interest. It is my judgment that we should forgo insisting upon that amendment, and secure the passage of the bill next
Monday, if we can. I have talked to M r . Kilburn about it. If we
strike out that interest amendment, and pass the bill promptly so it
will go to the Senate in time to pass before June 30. I n the event the
Senate should have other notions about the bill, of course we will
have to deal with that when we get to it later on. B u t we will at
least have an opportunity to have the bill considered so as to permit
passage before June 30 that way. Unless I hear objections, that is
what we will do on that particular bill.
Now, we have with us this morning M r , Dillon, Secretary of the
Treasury, and M r . Martin, Chairman of the Federal Reserve Board,
to testify on the desirability of extending H . R . 11499, to extend the
direct purchase authority of the Federal Reserve.




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A M E N D T H E FEDERAL RESERVE ACT

M r . Martin, since you were here first, you may proceed with
your statement, and after that we will hear from M r . Dillon.

STATEMENT OF HON. WILLIAM McCHESNEY MARTIN, JK.,
CHAIRMAN OF THE FEDERAL RESERVE BOARD
M r . MARTIN. The Board of Governors of the Federal Reserve
System recommends prompt enactment of H . R . 11499, which would
extend for another 2 years the authority of the Federal Reserve
System to purchase up to $5 billion of special securities direct from
the Treasury.
This direct borrowing authority is an operating convenience which,
while seldom used in recent years, has contributed to flexibility
in the Treasury's management of the public debt. Its use in the
past has avoided needless strains in the banking system immediately
preceding taxpayment -dates. Even when not used, it has enabled
the Treasury to operate with'lower cash balances than would otherwise
have been feasible, and has provided added leeway in timing new
offerings. Furthermore, it is always possible that we may find ourselves in an emergency in which the availability of this sort of "standb y " financing would be very important.
' Borrowing under this authority has been temporary as well as
infrequent. It has been confined to its proper role as a useful tool
of debt management and has not been used as a lever to induce
financing of Government deficits through unwarranted expansion of
Federal Reserve credit.
The statutory provisions which this bill would continue require
that the details of all transactions directly with the Treasury be
reported in the annual report of the Board of Governors. I should
also like to add that such borrowing, when it is outstanding, is reported separately in the weekly statement of condition of Federal
Reserve banks.
The CHAIRMAN. Thank you, sir. I t is possible we will want to
ask you some questions later. M r . Dillon, we will hear from you
now.

STATEMENT OF HON. DOUGLAS DILLON, SECRETARY OF THE
TREASURY
Secretary DILLON. M r . Chairman, and members of the committee,
I am happy to appear before you this morning in support of H . R .
11499. Tins bill would extend until June 30, 1966, the existing authority of the Federal Reserve banks to purchase directly from the
Treasury public debt obligations up to a limit of $5 billion outstanding
at any one time.
This authority, which would otherwise expire at the end of this
month, was first granted in its present form in 1942 for a temporary
period. It has been renewed on 10 separate occasions since that time*
While used only very sparingly during these past 22 years, and not at
all since 1958,1 strongly share the conviction of my predecessors that
maintenance of this authority is essential to the proper and economical management of the finances of the Government.




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AMEND T H E FEDERAL RESERVE ACT

The value of the direct purchase authority does not rest on its
. frequent or extensive use. Rather, it is designed to provide protection
against the inevitable uncertainties in estimates of receipts and expenditures and in our borrowing operations and the unforeseen contingencies that can arise from time to time. A t no time in our financial planning do we look upon this authority as a substitute for market
financing or a cheap source of funds. But its continuing availability
as a backstop for all our Treasury cash and debt management operations both permits more economical management of our cash position
over the years and assures our ability to provide needed funds almost
instantaneously in the event of a national emergency.
The reasons we feel that maintenance of this authority is essential
can be summarized under three points. First, year in and year out
it provides us with the margin of safety that is necessary if we are to
permit our cash balance to fall to exceptionally low levels during
periods of seasonally lean revenues. This, in turn, allows the public
debt to be kept to a minimum and saves interest costs to the Government.
During the past 6 months, for instance, we have succeeded in
holding the Treasury's operating cash balance down to an average of
$5.1 button, or only about half of an average month's cash expenditures. That average has implied, of course, much lower balances
during some periods, as we awaited heavy receipts or the proceeds
of cash borrowings. With budgetary and trust fund payments running
at a rate of over $10 billion per ifioiith, these low balances could be
maintained, even for brief periods, only because as an emergency
support we could count on obtaining funds overnight, if necessary,
through the authorization to borrow temporarily from the Federal
Reserve banks. As recently as this past April, it appeared possible
that use of the authority might be necessary to tide us over a short
period before sizable individual tax collections began to flow in. I n
the end, that did not prove necessary. But without the potential
ability to borrow directly from the Federal Reserve, it is clear that
prudence would have compelled us to enlarge our cash balance by
borrowing additional amounts in the market at a time when market
conditions were unfavorable and interest costs had temporarily risen.
In the second place, there is always the possibility that erratic
swings in money, market conditions and sentiment may produce
disturbances of a character that would warrant postponement of a
planned Treasury borrowing. In such instances, it is the availability
of direct access to Federal Reserve credit that would permit us the
flexibility required in such a situation to draw on our cash and to
await more propitious market circumstances.
Finally, and perhaps most crucial in an uncertain world, the direct
purchase authority is available to provide an immediate source of
funds for temporary financing should this be required by a national
emergency. It is, unfortunately, impossible to visualize the kind
of situation i n which our financial markets would be disrupted and
even paralyzed at a time when large amounts of cash had to l>e raised
to maintain governmental functions and meet the emergency. Consequently, the direct purchase authority is a key element in all our
financial planning for a national emergency or a nuclear attack. A n d
this is the reason why this authority is required for as much as $5
billion, even though in the past little more than a quarter of that
amount has ever been used.



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AMEND T H E FEDERAL RESERVE ACT

Consistent w i t h these three points, I want to emphasize that the
direct purchase authority is viewed by us as a temporary accommodation to be used only under unusual circumstances. The Treasury
fully agrees w i t h the general principle that its new securities should
meet the test of the market and that purchases of Treasury obligations
b y the central bank should normally be made through that same
public market. Moreover, this direct purchase authority should not
be considered a means by which the Treasury may independently
attempt to influence credit conditions b y circumventing the authority
of the Federal Reserve to engage in open market operations in Government securities. I n that connection, i t is important to emphasize
that any direct recourse by the Treasury to Federal Reserve credit
under this authority is subject to the discretion and control of the
Federal Reserve itself.
This borrowing authority has not been abused in the past. The
accompanying table, providing details on the instances of actual use,
shows clearly that i t has been used only rarely and for limited periods.
The borrowings aire promptly shown on both the weekly Federal
Reserve and end-of-month Treasury statements, assuring the widespread publicity that is the* best possible deterrent to abuse. I n
addition, the Federal Reserve must include such information in its
annual report to the Congress. And, of course, this borrowing, like
any other Treasury borrowing, is subject to the debt limit.
I t is a happy circumstance that we have not had to use this authori t y for more than 6 years. B u t , as an insurance policy against
financial emergency and an essential backstop to our cash management, i t must be kept available in case of need.
(The table referred to follows:)
Direct

borrowing

from

Calendar year

1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952...
1953
1954
1955...
1956.
1957
1958
1959
I960
1961
1962
1963
1964 to date

Federal

Reserve banks,

Days used

—

19
48
None
9
None
None
None
2
2
4
30
29
15
None
None
None
2
None
None
None
None
None
None

1942 to date

Maximum
amount at
any time
(millions)

Number of
separate
times used

Maximum
number of
days used at
any one time

$422
1,320

4
4

6
28

484

2

7

220
108
320
811
1,172
424

1
2
2
4
2
2

2
1
3
9
20
13

207

1

2

The CHAIRMAN. Thank you, M r . Secretary.
This is the 11th time that requests have been made to extend this
act, as I understand it.
Secretary DILLON. That is correct.



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A M E N D T H E F E D E R A L RESERVE ACT

The CHAIRMAN. And I do not know of any objection from anyone
to extending it. If any member desires to ask questions—we nave
two other matters here this morning—but if any member wants to
ask a question, certainly we would not deny that member the privilege
of doing so. But: if there are no questions——
M r : REUSS. I have one brief question.
Chairman Martin, if the Congress grants you this authority again,
and if a situation would be presented where this country was at full
employment, with no more than 3 percent unemployed, and full use
of its resources, and the Treasury came around and wanted to borrow
under this direct authority $5 billion, would you comply?
M r . MARTIN. Under those circumstances, we would probably turn
i t down.
M r , REUSS. T h a n k y o u .
M r . STEPHENS. M r . C h a i r m a n ?
T h e C H A I R M A N . M r . Stephens.

M r . STEPHENS. I would like to know, when was the last time that
we acted on this, to extend it?
Secretary DILLON. 1962.

M r . STEPHENS. A n d it is a 2.-year matter?
Secretary DILLON. It has be&i extended 2 years at a time for about
the last 14 years.
For about the first 7 or 8 years the extensions were rather erratic—
some of them were for 18 months or less, one was for more than 3 years.
B u t they got into this 2-year pattern, I think, finally in 1950. So it is
the last 14 years.
M r . KILBURN. M r . Chairman, I think everybody is agreed this is
a good bill, and I cannot imagine anybody opposing it. I think it is
an excellent scheme, an excellent way to have the Treasury and the
Federal Reserve work together for the good of the country. I hope
there won't be any opposition to the bill.
T h e CHAIRMAN. M r . W h i t e ?

M r . WHITE. Just one question I would like to ask, M r . Chairman,
having not been on the committee before this Congress. Is the
rate of interest set by statute?
Secretary DILLON. NO, the rate of interest is not set by statute.
It is set by agreement with the Federal Reserve—the Open Market
Committee, actually. A n d the agreement that has been in effect for
some time has been that the rate of interest would be one-quarter of 1
percent below the current rediscount rate.
M r . WHITE. Thank you. I have no other questions.
M r . TALCOTT. M r . C h a i r m a n ?
T h e CHAIRMAN. M r . T a l c o t t .

M r . TALCOTT. M r . Secretary, I take it that the only new reason
for needing this bill, other than the reasons that were advanced in
previous years, is the possibility of nuclear attack.
Secretary DILLON. Well, I tliink that has been a reason that has
been in the background certainly for the last 4 or 5 or 6 or 8 years,
since the. Soviet Union has achieved that capability.
M r . TALCOTT. But it was never mentioned before.
Secretary DILLON. It was mentioned 2 years ago, it certainly was
in the background even before that, and it is certainly strongly
there now.




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A M E N D T H E FEDERAL RESERVE ACT

M r , TALCOTT. Would there be much use for money if there were a
nuclear attack?
Secretary DILLON. It depends how serious it was. I think there
would be a need for money. We do have all sorts of emergency plans
to handle that sort of thing, and this is part of it. There would be a
period when you had no Congress, and you would have to get them
together. This would fill in during that period.
M r . TALCOTT. Well, I am most pleased to hear this explanation,
that wo are not fearing complete nuclear holocaust every time we
talk about nuclear attack. Thank you .very much.
M r . TAFT. M r . Chairman?
T h e CHAIRMAN. M r . T a f t .

M r . TAFT. M r . Dillon, in your remarks you state that the purchase
authority should not be considered as a means by which the Treasury
may independently influence credit conditions by circumventing the
authority to engage in open market operations. H o w could it cut
into that? What did you mean by that statement?
Secretanr DILLON. When I said that, I just wanted to point out
the fact that this is subject to joint agreement with the Federal
Reserve System. I n other words, we cannot tell the Federal Reserve
that they must buy these from us. We can only sell to them if the
Federal Reserve agrees with us that they should buy.
M r . TAFT. SO if they continue to engage in public market operations
and don't wish to make a purchase they don't have to?
Secretary DILLON. That is correct.
M r . TAFT. If they did make a purchase, it would cut into their
ability to engage in open market operations?
Secretary DILLON. Not necessarily.
M r . TAFT. That is what I don't understand.
Secretary DILLON. This is the opposite side of the coin of the question M r . Keuss asked. We in the Treasury cannot tell the Federal
Reserve to buy very substantial amounts of direct purchase securities.
They can only be sold to them at such times as the Open Market
Committee agrees. That is what the law says. I just wanted to
point that out.
M r . TAFT. T h a n k you.

The CHAIRMAN. Any; other questions? M r . Fino?
M r . FINO. I would just like to make an observation. W i t h the
Secretary of Treasury here, I have the temptation to make one
observation.
I cannot resist that temptation this morning—to again remind the
Secretary^ of the Treasury that needed funds—and this is always a
problem in the Government—needed funds could very voluntarily
and easily be furnished through a Government-run lottery, which
could pump into the Treasury of the United States at least $10
billion a year.
Now, that is a sizable sum of money you fellows could play around
with, if we had one. Isn't that so?
Secretary DILLON. That is a lot of money; that is correct. I will
have to agree with that.
The CHAIRMAN. A n y other question^? Thank you, gentlemen,
very much. We certainly appreciate your testimony.
M r . MOORHEAD. M r . Chairman, is it contemplated that we will
take action today on H . R . 11499?



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A M E N D T H E FEDERAL RESERVE ACT

The CHAIRMAN. Yes, we would like to take action now on this bill
if it is all right.
M r . KILBURN. I move we adopt it, and that the chairman take
such action to bring it before the House.
The CHAIRMAN. Are you ready for the question?
As many as, favor the motion by M r . Kilburn let it be known by
saying aye.
[Chorus of "Aye."]
T h e CHAIRMAN, A l l opposed, no.

(No response.)
The CHAIRMAN. The ayes have it unanimously: We will take
such action as deemed necessary to get it on the calendar. We will
now go into executive session.
Now, the next is a resolution by M r . Rains, House Joint Resolution
1041. The Senior Citizens Housing Act of 1962 established a new
program under the Farmers Home Administration for the insurance
of private loans for rental housing for the elderly in small towns,
2,500 population or less, and rural areas. These loans are limited to
$100,000 each, carry a term of u p to 40 years, and currently bear
interest at the rate of 5% percent: Existing law includes a termination date of June-30, 1964. This resolution would extend the authority of this program for an additional 90 days to September 30,
1964.
This interim extension is needed to allow the program to continue
operations until the Congress has time to act on general housing
legislation, including the administration recommendation for the
continuation of this program. It seems to be a very reasonable
request. M r . Rains made the request. We all have great respect
for M r . Rains. We want to honor any request that he makes, especially on housing, since he is chairman of the Housing Subcommittee, and he believes this is necessary and desirable. Any comments or any suggestions?
M r . BARRETT. I move it be reported out favorably.
M r . KILBURN. M r . Chairman—just before that—of course this is
under M r . Rain's subcommittee. I just wanted to ask this. In the
past I have seen some housing reports come out on the floor that I
thought were terrible. Now, supposing a bill like that comes out
before September 30 and it is licked. What happens to his resolution?
The CHAIRMAN. Of course it runs out in 90 days. There would
have to be another extension, or it would die.
M r . CLAWSON. M r . Chairman, are there applications for this kind
of housing now?
The CHAIRMAN. I don't know the score on that. We just granted
the 90 days so they could continue normal operations. M r . Barrett
made a motion.
M r . WIDNALL. M r Chairman, M r . Rains spoke to me about this.
I don't see any objection to this at all. I t just continues the authority
for 90 days. I t does not provide additional authorization. I think it
should be supported.
M r . STEPHENS. M r . Chairman, may I ask this: Isn't it true that
there are a number of pending applications that could not be acted
upon if we don't do this?
M r . TALCOTT. Is that true?




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A M E N D T H E F E D E R A L RESERVE ACT

The CHAIRMAN. M r . Barrett makes a motion that the resolution be
reported favorably and that the chairman take such action as may
be necessary to get early action and passage. # Are you ready for the
question? As many as favor the motion, let it be known by saying
aye.
[Chorus of "Aye."]
T h e CHAIRMAN. A l l opposed, no.

(No response.)
The CHAIRMAN. The ayes have it. The resolution is unanimously
adopted.
Without objection, we will stand in recess subject to call of the Chain
(Whereupon, at 10:30 a.m., the committee recessed, subject to the
call of the Chair.)




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